Tutorial 12 Jane Lazar and Huang (4th Edition)Chapter 19-MFRS 110
Question 3 page 354 Winnie’s current year-end was 31 March x9. Its financial statements were authorised for issue by its directors on 6 May x9 and the annual general meeting will be held on 3 June x9. The following matters have been brought to your attention.
a)
On 12 Apri Aprill x9, x9, a fir fire e com compl plet etel ely y des destr troy oyed ed the the company’s largest warehouse and the inventory it contained. The carrying amounts of the warehouse and the inventory were RM10 million and RM6 million, respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of RM9 million from its insurers. Winnie’s trading operations have been severely disrupted since the fire and it expects large trading losses for some time to come.
b)
A single single clas classs of inv inven entor tory y held held at anothe anotherr ware warehou house se was was value valued d at its cost cost of RM46 RM460,0 0,000 00 at 31 March x9. In April x9, 70% of this inventory was sold for RM280,000 on which Winnie’s sales staff earned a commission of 15% as at 31 March x9.
c)
On18 On18 May May x9, x9, the the gove governm rnmen entt announ announced ced tax tax char charge gess which which hav have e the the effe effect ct of of incre increasi asing ng Winnie’s deferred tax liability by RM650,000 as at 31 March x9.
Required: Explain the required treatment of the above items by Winnie in its financial statements for the year ended 31 March x9.
(a) •
• •
This is normally classified as non-adjusting event as there is no reason to doubt that the value of the warehouse and the inventory it contained was worth less than its carrying amount at 31 March x9. The total loss suffered is RM16 million but the entity expects to recover RM9 million of this loss. As this event has caused serious disruption to trading, there should be disclosure by way of note of details of the non-adjusting events and the effects of the recovery from the insurers. Recoveries from third parties have to be reviewed separately. The going concern status of the entity is questionable due to disruption of trading and projected operating losses. If Winnie is assesses as to be no more a going concern, then the fire and the consequences become adjusting events requiring the financial statements statements to be redrafted and prepared on a liquidation basis.
(b) •
The 70% of the inventory amounting to RM322,000 (RM460,000 x70%) was sold for net amount of RM238,000 (RM280,000 x85%). A large portion was sold after the yearend at a loss. The sale price is an evidence of the net realisable value as at the balance sheet date. Therefore, it is an adjusting event. The carrying value of the inventory should be written down by RM120,000 to its net realisable value of RM340,000. It is unlikely that the fall in value of the inventory could be due to events after the balance sheet date.
70% x cost = RM238,000 Cost = RM340,000 Original cost = RM460,000 Therefore, Theref ore, the differ different ent is RM120,000
(c) •
Date of announcement of tax rate change is beyond the period of consideration in MFRS110. It is a non-adjusting non-ad justing event. *Authorised for issue by its directors on 6 May x9 **The government announced tax charges on 18 May x9
